`Jury Is Still Out,' But Front Sees No Bear In The Trees

January 28, 1999|By George Gunset, Tribune Staff Writer.

A million dollars will get you in the door of Marshall Front's investment advisory firm, so it seemed a bargain to give up only a little sleep time to record his latest thoughts on the outlook for the economy and stock market at a breakfast last week.

Known for his incisive market commentary and unfailing courtesy, Front agreed to sit down for an 8 a.m. interview at, ironically, the Mid-Day Club.

Front, a former chief of Stein Roe & Farnham whose career spanned about 30 years at the Chicago-based mutual fund group, had joined a small firm as managing partner to seek out well-heeled clients--individual and institutional.

Trees Front Associates Inc., formed in 1994, has performed well, producing a compound annual growth rate in stock selections, after deduction of fees, of 32.3 percent over four years, beating the benchmark Standard & Poor's 500 stock index, which reached 30.6 percent. In 1998, the firm's growth rate was a sparkling 39.2 percent, easily outperforming the S&P's 28.8 percent gain.

Settling down to a large bagel, well toasted, with cream cheese, Front began to speak just as the sun broke through the fog, perhaps prophetically, outside the 56th-floor windows of the First National Bank Building. Following is an edited transcript of the interview.

Q--Might there actually be a real bear market in our future?

A--It's not in sight, yet. But there will inevitably be a period when confidence ebbs and the government does some things that aren't exactly right and there is a confluence of factors that cause the economy to weaken. My definition of a bear market has two components: A significant decline of more than 20 percent, and that decline is sustained by deteriorating economic conditions.

Q--So last year didn't qualify?

A--That's right. We really haven't had a true bear market in a number of years. There are lots of structural reasons to believe that the economic cycles that we are likely to experience in the future are going to be more moderate.

Q--Already this year we've experienced a series of mini-shocks and the market has taken it in fairly good stride. Is this all background noise? Has there been a fundamental change early this year? What about Chairman Alan Greenspan and likely Federal Reserve response?

A--I think the jury is still out on how the economy is going to perform. Greenspan is pragmatic and will do what is necessary to keep the economy doing well, if for no other reason than Asia and our Latin American trading partners are that much more dependent because of their own domestic woes and the need for strong exports to the United States. The American consumer seems to have an insatiable demand for everything from palm-held computers to big-ticket automobiles and 46-inch televisions. There's no inflation, he's got a job, he's secure.

Q--What is your outlook for the gross domestic product for the year?

A--We see growth of 2 to 2.5 percent. It will be stronger in the second half than the first half. However, our forecasts and the forecasts of most economists have consistently underrated strength in the economy. It wouldn't surprise me to see the economy stay a bit stronger, longer, and the slowdown in the first half that will eventually come be less than we thought.

Q--In that scenario, would it be likely that the open market committee of the Federal Reserve would not cut interest rates? Is there any possibility that they might raise rates?

A--Not in today's global environment, which is recession in many parts of the world and deflation. There is no impetus for them to raise rates and little reason to believe that is going to change in the near future. We're looking for rates to remain steady for the first half of the year. But if the economy does weaken, the Fed will come in and cut rates.

Q--What is your view of Greenspan's concerns about the stock market?

A--He's been worried as we have been worried that in view of the declining corporate profit growth, it is difficult to justify the level of stock prices in many groups. But, you have to look at something very carefully: If you disaggregate the overall corporate profit number and look at it industry by industry, you'll see that very substantial portions of the slowdown in that growth has been caused by the dismal performance of energy and non-ferrous metals in particular.

Q--What's the good news?

A--We have had superb performance in the last six months, and going forward I think we'll see a continuation, of the technology companies, where there's been a resurgence following a big inventory correction. I think we've seen great strength in health care. We have had a lot of strength in housing and the things related to it.

Q--Your firm emphasizes growth and value investing in the same portfolio. Why not concentrate on one or the other?